In addition to individuals and married couples, there are many other potential client types. Because the goals of an organization are likely to be very different from those of an individual, you should be familiar with these other client types:


Sole proprietorship
A sole proprietorship is a business organization that is unincorporated and has just one owner. The finances of the sole proprietor business and the owner are one and the same. The sole proprietor has unlimited liability and is responsible for all business debts. For tax purposes, all business income or losses flow through directly to the owner.

Partnerships
  • Business partnership - all partners are equally responsible for business debts and share equally in business profits (which pass through to be reported on each partner's personal income tax return).

  • Limited partnership - the general partner is responsible for managing the business and has unlimited liability for its debts, while the limited partners are not responsible for any of the debts.

  • Family limited partnership - this arrangement is used primarily as a means of minimizing estate and gift taxes but must have a legitimate business purpose (such as managing investment real estate, family business, etc.).
Corporations
The main advantage of all types of corporations is that the owners are not personally liable for the corporation's debts. There are three types:
  • C Corporation - thesecorporations must pay corporate income tax on their income, and the owners pay personal income taxes on profits received as dividends (known as double taxation).

  • S Corporation - this arrangement is suitable for small companies (no more than 100 shareholders) that want the legal protection of a corporation but the flow-through taxation of partnerships (corporate losses are applied to personal income tax returns).

  • Limited Liability Corporation - this type of structure allows protection from debts but is taxed more like a sole proprietorship.
Look Out!
You are likely to be given a description of a new business and asked which type of corporation it most resembles. If the question states that losses are expected in the first years, "S Corporation" is the correct answer. If it is a single owner and losses are not mentioned but protection from liabilities is noted, "LLC" is usually the correct answer. (Sole proprietorship is usually the fourth choice.)

Other Entities

  • Estates - an estate account is typically open only a short time, until the estate assets are distributed to beneficiaries. Consequently, long-term or speculative investments are usually not appropriate.

  • Trusts - the IA must recommend investments that are suitable for the beneficiaries of the trust, not for the trustee.
Exam Tips and Tricks
Consider these sample exam questions about client types:
  1. Which business entity would provide a flow-through of business income or losses as well as limited liability to the owners?
    1. Sole Proprietorship
    2. General Partnership
    3. C Corporation
    4. S Corporation
The correct answer is "d" - only the S Corporation offers both these advantages.
  1. Which investments would be considered suitable for an estate account?
    1. Treasury bonds
    2. Options
    3. Money market fund
    4. Growth-stock mutual fund
The correct answer is "c", since Treasury bonds, growth-stock mutual funds and options are not suitable for an account with a short time horizon.
Current Status and Financial Goals

Related Articles
  1. Small Business

    What's a Sole Proprietorship?

    A sole proprietorship is an unincorporated business that has one owner who pays the taxes on the profits of that business.
  2. Small Business

    Should You Incorporate Your Business?

    Find out how becoming a corporation can protect and further your finances.
  3. Small Business

    What is Unlimited Liability?

    Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.
  4. Taxes

    Become an LLC and Save Taxes Under Trump (Maybe)

    If President Trump gets the tax reform bill he wants, LLCs may be able to reduce their taxes – but not in the way you might think.
  5. Small Business

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  6. Investing

    The Basics of Forming A Limited Liability Company (LLC)

    An LLC is a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.
  7. Insurance

    Tax Incentives for Biz Owners With LTC Insurance

    Tax deductions for long-term care insurance premiums are often overlooked by small business owners.
  8. Insights

    Limited Liability Partnership (LLP): The Basics

    LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
  9. Small Business

    Using Life Insurance as a Business Succession Plan

    Life insurance can be a good succession plan tool for business partnerships.
Frequently Asked Questions
  1. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ...
  2. What is the difference between deflation and disinflation?

    Learn what deflation and disinflation are, how supply and demand affect price levels, and the difference between deflation ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. What does CHIPS UID mean?

    Learn what CHIPS UID stands for and how it facilitates the transfer of funds as the back-end of the ACH network for both ...
Trading Center